Capacity and Process Selection

Capacity Planning
Operations Management
Capacity and Strategy
Capacity decisions must be integrated into

the mission and strategy of organization
All 10 OM decisions as well as marketing
and finance are impacted by changes in

capacity
Investments in capacity not to be isolated

but a coordinated step to achieve
organizations objective
Types of Planning Over a

Time Horizon
Long Range
Planning
Intermediate
Range Planning
Add Facilities
Add long lead time equipment
Sub-Contract
Add Equipment
Add Shifts
*Limited options exist
Add Personnel
Build or Use Inventory
Short Range
Planning
Modify Capacity
Schedule Jobs
Schedule Personnel
Allocate Machinery
Use Capacity
3
Definition and Measures of Capacity

Design
Capacity:
The maximum throughput, or number of units

a facility can produce in a period of time.
Effective
capacity:
Capacity a firm can expect to receive given its

product mix, methods of scheduling, maintenance,
and standards of quality.
Utilization:
Actual output as a percent of design capacity.
Efficiency:
Actual output as a percent of effective capacity.
Utilization
Measure of planned or actual capacity
usage of a facility, work center, or
machine
Utilization
Actual Output
=
Design Capacity
Planned hours to be used
=
Total hours available
Efficiency
Measure of how well a facility or machine is
performing when used
Efficiency
Actual output
=
Effective Capacity
Actual output in units
=
Standard output in units
Determinants of Effective
Capacity
Facilities
Product and Service Factors
Process Factors
Human Factors
Operational Factors
Supply Chain Factors
External Factors
Steps in Capacity Planning
Estimate future capacity requirements.

Evaluate existing capacity and facilities and identify
gaps.
Identify alternatives for meeting requirements.
Conduct financial analyses of each alternative.
Assess key qualitative issues for each alternative.
Select the alternative to pursue that will be best in
the long term.
Implement the selected alternative.
Monitor results.
Approaches to Capacity
Expansion
Expected Demand
Expected Demand
New Capacity
Demand
Demand
New Capacity
Time in Years
Time in Years
Capacity leads demand with an incremental expansion
Capacity leads demand with a one-step expansion

Expected Demand
New Capacity
New Capacity
Time in Years
Capacity lags demand with an incremental expansion
Demand
Demand
Expected Demand
Time in Years
Attempts to have an average capacity, with
an incremental expansion
Service Capacity Planning

Service capacity planning can present a number of
challenges related to:
The need to be near customers
Convenience
The inability to store services
Cannot store services for consumption later
The degree of demand volatility
Volume and timing of demand
Time required to service individual customers
10
Developing Capacity
Alternatives
Things that can be done to enhance capacity management:
Design flexibility into systems
Take stage of life cycle into account
Take a big-picture approach to capacity changes
Prepare to deal with capacity chunks
Attempt to smooth capacity requirements
Identify the optimal operating level
Choose a strategy if expansion is involved
11
Evaluation of Alternatives
Break Even Analysis

Cash Flow and NPV Analysis
Decision Theory
Waiting Line Analysis
Simulation
12
Breakeven Analysis
Technique for evaluating process &

equipment alternatives
Objective: Find the point ($ or units) at

which total cost equals total revenue
Assumptions
Revenue & costs are related linearly to volume
All information is known with certainty
No time value of money
16
Break-Even Analysis
Fixed costs: costs that continue even if

no units are produced: depreciation,
taxes, debt, mortgage payments, salaries,
etc
Variable costs: costs that vary with the
volume of units produced: labor wages,

materials, portion of utilities
17
Breakeven Chart
Total revenue line
Cost in Dollars
Breakeven point
Total cost = Total revenue
Profit
Profit
Total cost line

Variable cost
Loss
Fixed cost
Volume (units/period)
18
Crossover Chart
Smooth Boards Inc., wants to enter the market quickly with a new finish
on its ski boards. It has three choices:
Repair the old equipment at a cost of $800,
Make major modifications at the cost of $1,100, or
Purchase new equipment at a net cost of $1,800
If the firm chooses to repair the old equipment, materials and labor cost
would be $1.10 per board. If it chooses to make modifications, materials
and labor cost would be $0.70 per board. If it buys new equipment,
variable costs are estimated at $0.40 per board.
Graph the three total cost lines on the same chart (preferably on graph
paper)
Which alternative would be chosen if more than 3,000 ski-boards can be
sold?
Which alternative should the firm use if it thinks the market for boards
would be between 1,000 and 2,000?
What are the cross-over points from the graph?
19
Crossover Chart
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Fixed cost - Process C

Fixed cost - Process B
Fixed cost - Process A
Process A
Process B
Process C
Lowest cost process
20
Decision Theory
21
Decision Theory
represents a general approach to decision making
which is suitable for a wide range of operations
management decisions, including:
Capacity
planning
product and
service
design
location
planning
equipment
selection
Decision Theory Elements

A set of possible future conditions exists
that will have a bearing on the results of
the decision
A list of alternatives for the manager to
choose from
A known payoff for each alternative
under each possible future condition
23
Decision Theory Process
Identify possible future conditions:
Develop a list of possible alternatives, one of

which may be to do nothing
Determine the payoff associated with each

alternative for every future condition
If possible, determine the likelihood of each

possible future condition
Evaluate alternatives according to some decision

criterion and select the best alternative
24
Decision Theory Process
Bounded Rationality
The limitations on decision making caused by costs,

human abilities, time, technology, and availability of
information
Sub-optimization
The result of different departments each attempting to

reach a solution that is optimum for that department
25
Decision Environment
Certainty - Environment in which

relevant parameters have known values
Risk - Environment in which certain

future events have probable outcomes
Uncertainty - Environment in which it

is impossible to assess the likelihood of
various future events
26
Payoff Table
A table showing the expected payoffs for each

alternative in every possible state of nature
Possible Future Demand
Alternatives
Low
Moderate
High
Small facility
$10
$10
$10
12
12
(4)
16
Medium facility
Large Facility
A decision is being made concerning which size facility

should be constructed
The present value (in millions) for each alternative under
each state of nature is expressed in the body of the above
payoff table
Student Slides
Decision Making under

Uncertaintity
Decisions are sometimes made under complete
uncertainty: No information is available on how likely
the various states of nature are.
Decision Criteria:
Maximin
Maximax
Choose the alternative with the best possible payoff
Laplace
Choose the alternative with the best of the worst possible

payoffs
Choose the alternative with the best average payoff
Minimax regret
Choose the alternative that has the least of the worst regrets
28
Example Maximin Criterion

Alternatives
Low
Moderate
High
Small Facility
$10
$10
$10
12
12
(4)
16
Medium Facility
Large Facility
The worst payoff for each alternative is

Small facility:
$10 million
Medium facility $7 million
Large facility
-$4 million
Choose to construct a small facility
Student Slides
Example Maximax Criterion

Alternatives
Low
Moderate
High
Small Facility
$10
$10
$10
12
12
(4)
16
Medium Facility
Large Facility
The best payoff for each alternative is

Small facility:
$10 million
Medium facility $12 million
Large facility
$16 million
Choose to construct a large facility
Student Slides
5S-30
Example Laplace Criterion

Alternatives
Low
Moderate
High
Small Facility
$10
$10
$10
12
12
(4)
16
Medium Facility
Large Facility
The average payoff for each alternative is

Small facility:
(10+10+10)/3 = $10 million
Medium facility (7+12+12)/3 = $10.33 million
Large facility
(-4+2+16)/3 = $4.67 million
Choose to construct a medium facility
Student Slides
5S-31
Example Minimax Regret

Alternatives
Low
Moderate
High
Small Facility
$10
$10
$10
12
12
(4)
16
Medium Facility
Large Facility
Construct a regret (or opportunity loss) table

The difference between a given payoff and the best
payoff for a state of nature
Regrets
Alternatives
Low
Moderate
High
Small Facility
$0
$2
$6
Medium
Facility
Large Facility
14
10
Student Slides
Example Minimax Regret

Regrets
Alternatives
Low
Moderate
High
Small Facility
$0
$2
$6
Medium Facility
Large Facility
14
10
Identify the worst regret for each alternative

Small facility
$6 million
Medium facility
$4 million
Large facility
$14 million
Select the alternative with the minimum of the maximum
regrets
Build a medium facility
Student Slides
5S-33
Decision Making Under Risk
Decisions made under the condition that the

probability of occurrence for each state of nature
can be estimated
A widely applied criterion is expected monetary
value (EMV)
EMV
Determine the expected payoff of each alternative,
and choose the alternative that has the best expected
payoff
This approach is most appropriate when the decision
maker is neither risk averse nor risk seeking
34
Example EMV
Alternatives
Small Facility
Medium Facility
Large Facility
Low (.30)
Moderate (.50)
High (.20)
$10
$10
$10
12
12
(4)
16
EMVsmall = .30(10) +.50(10) +.20(10) = 10

EMVmedium = .30(7) + .50(12) + .20(12) = 10.5
EMVlarge = .30(-4) + .50(2) + .20(16) = $3
Build a medium facility
Student Slides
5S-35
Decision Tree
Decision tree
A schematic representation of the available alternatives and

their possible consequences
Useful for analyzing sequential decisions
Composed of
Nodes
Branches
Decisions represented by square nodes

Chance events represented by circular nodes
Alternatives branches leaving a square node
Chance events branches leaving a circular node
Analyze from right to left

For each decision, choose the alternative that will yield
the greatest return
If chance events follow a decision, choose the
alternative that has the highest expected monetary
value (or lowest expected cost)
36
Expected Value of Perfect

Information
Expected value of perfect information: the
difference between the expected payoff under
certainty and the expected payoff under risk
Expected value of
Expected payoff
perfect information = under certainty
Expected payoff
under risk
Process Strategy
38
Process Strategies
Process value creation activities
Process strategy organizations
approach for producing goods or
providing services
Objective
Meet or exceed customer requirements

Meet cost & managerial goals
Has long-run effects
Production efficiency
Product & volume flexibility
Cost & quality
39
Process
Job Shop
Batch Processing
Repeat Processing
Continuous Processing
40
Product-Process Matrix
Low-Volume
(Intermittent)
High Variety
One or few units per
run, high variety
(allows customization)
Process focus
projects, job
shop,(machine, print,
carpentry)
High-Volume
(Continuous)
Mass
Customization
(difficult to achieve,
but huge rewards)
Repetitive
(autos, motorcycles)
Changes in modules
Modest runs, standardized
modules
Changes in attributes
(such as grade, quality,
size, thickness, etc.)
Long runs only
Repetitive Process
(Modular)
Poor strategy
Product focus
(commercial baked
goods, steel, glass)
41
Process-Focused Strategy
Facilities are organized around specific
activities or processes
General purpose equipment and skilled
personnel
High degree of product flexibility

Typically high costs and low equipment
utilization
Product flows may vary considerably

making planning and scheduling a
challenge
42
Repetitive Focused Strategy
Facilities often organized by assembly

lines
Characterized by modules
Parts & assemblies made previously
Modules combined for many output

options
Other names
Assembly line
E.g. auto-manufacturing, fast-food, pcs, household appliances, etc
46
Product-Focused Strategy
Facilities are organized by product
High volume, low variety
Conversion or further processing of

undifferentiated materials such as petroleum,
chemicals, or beer
Follows a predetermined sequence of steps, but

flow is continuous rather than discrete highly
standardized
Other names
Line flow production
50
Mass Customization
Using technology and imagination to

rapidly mass-produce products that cater
to unique customer desires
Under mass customization the three

process models become so flexible that
distinctions between them blur, making
variety and volume issues less significant
55
Process Strategies
Repetitive Focus
Modular design
Flexible equipment
Modular techniques
Mass Customization
Effective scheduling
techniques
Process-focused
High variety, low volume

Low utilization (5% - 20%)
General purpose equipment
Rapid throughput
techniques
Product-focused
Low variety, high volume

High utilization (70% - 80%)
Specialized equipment
56
Techniques for Improving Service

Productivity
Strategy
Technique
Separation
Self-service
Postponement
Customizing at delivery
Focus
Restricting the offerings
Structure service so
customers must go where
service is offered
Self-service so customers
examine, compare and
evaluate at their own pace
70
Techniques for Improving Service

Productivity - Continued
Modules
Automation
Scheduling
Training
Modular selection of
service. Modular
production
Separating services that

lend themselves to
automation
Precise personnel
scheduling
Clarifying the service
options
Explaining how to avoid
71
Facility Layout
72
What is Facility Layout
Location or arrangement of everything

within & around buildings
Determines long-run efficiency of

operations
Helps achieve a strategy that supports

differentiation, low cost or quick
response
OM - location and layout strategy
Basic Objective
product or service quality enhancement

To use workers and space efficiently.
To avoid bottlenecks.
To minimize material handling costs.
To eliminate unnecessary movements of
workers or materials.
To minimize production time or customer
service time.
To design for safety
Types of Layout
Product Layout
Process Layout
Fixed Position Layout
Hybrid Layout
Repetitive Processing:
Product Layouts
Product layout
Layout that uses standardized processing

operations to achieve smooth, rapid, highvolume flow
Station
1
Raw materials
or customer
Material
and/or
labor
Material
and/or
labor
Station
2
Material
and/or
labor
Station
3
Station
4
Finished
item
Material
and/or
labor
Used for Repetitive Processing

Repetitive or Continuous
Student Slides
6-76
Non-repetitive Processing:
Process Layouts
Process layouts
Layouts that can handle varied processing

requirements
Dept. A
Dept. C
Dept. E
Dept. B
Dept. D
Dept. F
Used for Intermittent processing

Job Shop or Batch
Student Slides
6-77
Fixed Position Layouts
Fixed Position layout
Layout in which the product or project remains

stationary, and workers, materials, and
equipment are moved as needed
Student Slides
6-78
Combination Layouts
Some operational environments use a combination of

the three basic layout types:
Hospitals
Supermarket
Shipyards
Some organizations are moving away from process

layouts in an effort to capture the benefits of product
layouts
Cellular manufacturing
Flexible manufacturing systems
79
Line Balancing
Line balancing
The process of assigning tasks to workstations in such a
way that the workstations have approximately equal time
requirements
Goal:
Obtain task grouping that represent approximately
equal time requirements since this minimizes idle
time along the line and results in a high utilization of
equipment and labor
Why is line balancing important?
1.
It allows us to use labor and equipment more
efficiently.
2.
To avoid fairness issues that arise when one
workstation must work harder than another.
80
Designing Process Layouts

The main issue in designing process
layouts concerns the relative placement of
the departments
Measuring effectiveness
A major objective in designing process layouts

is to minimize transportation cost, distance, or
time
82
Information Requirements
In designing process layouts, the following

information is required:
1.
2.
3.
4.
5.
6.
A list of departments to be arranged and their dimensions

A projection of future work flows between the pairs of work
centers
The distance between locations and the cost per unit of
distance to move loads between them
The amount of money to be invested in the layout
A list of any special considerations
The location of key utilities, access and exit points, etc.
83

Capacity and Process Selection

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Capacity and Process Selection

Hochgeladen von

Copyright:

Verfügbare Formate

Capacity Planning

Capacity and Strategy

Capacity decisions must be integrated into

All 10 OM decisions as well as marketing

and finance are impacted by changes in

Investments in capacity not to be isolated

Types of Planning Over a

*Limited options exist

Definition and Measures of Capacity

The maximum throughput, or number of units

Capacity a firm can expect to receive given its

Actual output as a percent of design capacity.

Actual output as a percent of effective capacity.

Steps in Capacity Planning

Estimate future capacity requirements.

Capacity leads demand with a one-step expansion

Service Capacity Planning

Break Even Analysis

Technique for evaluating process &

Objective: Find the point ($ or units) at

Revenue & costs are related linearly to volume

All information is known with certainty

No time value of money

Fixed costs: costs that continue even if

Variable costs: costs that vary with the

volume of units produced: labor wages,

Total cost line

Fixed cost - Process C

Lowest cost process

Decision Theory Elements

Decision Theory Process

Identify possible future conditions:

Develop a list of possible alternatives, one of

Determine the payoff associated with each

If possible, determine the likelihood of each

Evaluate alternatives according to some decision

Decision Theory Process

The limitations on decision making caused by costs,

The result of different departments each attempting to

Certainty - Environment in which

Risk - Environment in which certain

Uncertainty - Environment in which it

A table showing the expected payoffs for each

A decision is being made concerning which size facility

Decision Making under

Choose the alternative with the best possible payoff

Choose the alternative with the best of the worst possible

Choose the alternative with the best average payoff

Example Maximin Criterion

The worst payoff for each alternative is

Example Maximax Criterion

The best payoff for each alternative is

Example Laplace Criterion

The average payoff for each alternative is

Example Minimax Regret

Construct a regret (or opportunity loss) table

Example Minimax Regret

Identify the worst regret for each alternative

Decision Making Under Risk

Decisions made under the condition that the

EMVsmall = .30(10) +.50(10) +.20(10) = 10

A schematic representation of the available alternatives and

Decisions represented by square nodes

Analyze from right to left